The silver lining in a rate hike

When the Federal Reserve on Wednesday delivered its first interest rate hike in close to a decade, the move capped months of waiting and watching by investors and market seers alike.

And with a number of economic indicators, like wage pressure, still low, many market watchers are wary, with some wondering if the economyis strong enough to handle higher rates.

Still, for some people, higher interest rates stand to be a very good thing indeed. It just may not be the people who usually benefit when rates rise, at least in the short run.

What a Fed rate hike means for your wallet

Jose Luis Pelaez | Getty Images

Consider retirees and others living on their income from savings and programs like Social Security. It would seem obvious that a rate hike would help them because they would earn more on their investments.

That could happen again — but not right away, according to Barry Glassman, president of Glassman Wealth Services. “The first move signals that we are headed in the direction where retirees and conservative investors may someday get some yield back,” he said. “But not today.”

True, a quarter-point rate hike could quickly pass through and affect money market rates. But Glassman pointed out that firms offering money market funds have been waiving at least some of their fees for years in an effort to keep net rates on their funds from going negative. They waived an aggregate $6.3 billion in fees in 2014, up from $5.8 billion in 2013, and they are on track to waive another $5.6 billion in 2015, according to the Investment Company Institute.

Glassman said those same firms may be among the first beneficiaries of a rate hike. “A zero interest rate policy has been sucking billions out of brokerage firms around the country,” he said. If short-term rates rise enough to give them a margin to charge for their services, “a lot of brokerage firms can now charge the fees that are in the prospectuses.”

Some other experts, like Mike Krasner at iMoneyNet, question whether the firms will in fact rush to re-impose their maximum fees.

“It seems to me that yields would have to rise substantially before any firm could attempt to justify such a move, as it would undoubtedly prompt some investors to move their cash to another fund family, to a bank or somewhere else.” Money market fund providers “are in an extremely competitive industry,” he said.

But Krasner noted that firms have already started reducing the size of their fee waivers. And clearly, higher rates could at least give firms the option to impose a larger portion of their fees.
[“source -cncb”]